The door to 2022 is now closed and the S&P 500 (SPY) has collapsed again to place an exclamation mark on a bearish yr. This is the past. Now let’s talk concerning the future, including the most effective and worst case scenarios for equities in 2023. 40-year-old veteran investor Steve Reitmeister addresses this topical topic in his recent commentary, which incorporates a trading plan to remain one step ahead of the market. (Maybe even buy TSLA and ROKU for a dip). Read below for the complete story.
Today is the last session in 2022. And no wonder the bears desired to take control of the session… and the yr, again destroying the stock.
Currently, the baseline scenario for early 2023 is a continuation of this downward trend. However, that is removed from being set in stone.
So I assumed it could be a great idea to make use of today’s commentary for an summary of things that may change the trail of the markets for higher or worse… and the trading plan that goes with it.
Once again, the most effective place to grasp the baseline scenario for next yr is in my recent presentation: Prospects for the stock market in 2023.
In short, I expect a reasonably sharp recession in the primary half of 2023 with stock prices falling into the 3000 to 3200 range. Note that the common bear market has a 34% decline, which can be comparable to 3180 for the S&P 500 (SPY).
The reason why we may fall further than average is since the previous bull market had overall stock valuations (PE) as high because the 1999 tech bubble. So a few of that surplus may should be drained before the subsequent bull market begins.
I’m pleased to see a recent bull market emerge as well, with stocks rising from these lows until the top of the yr. Therefore, my 2023 outlook presentation also focuses on tips on how to find the time to get back to the underside to enjoy the fantastic gains that may come when the bull runs out of the gate.
My forecast is roughly in the course of the pack, with some market forecasters seeing it softer and a few seeing it way more threatening. And that is what makes investing so complicated. It’s hard to agree on what the long run holds. This clarity is barely available looking back.
Now let’s take a have a look at what would make this a milder bear market. Or what we’d call a best-case scenario.
The answer is sort of easy. That’s when the Fed amazingly engineers a soft landing with no recession unfolding. This would likely mean that we were already bottoming out at 3,491 in October, and in the approaching years, the stock will return to a long-term bullish march and reach recent highs.
There won’t be some magical moment where every trader will get the news at the identical time. As they are saying “nobody rings the bell downstairs“.
Instead, increasingly investors will judge the percentages that it is a soft landing that may cause them to shift their investments towards more bullish growth. While other investors will come to this conclusion later, possibly with a heavy dose of FOMO.
The higher we understand the following pointers now… the earlier we’d join the bull rally to enjoy more profits. Let’s review:
- The sooner inflation cools down, with particular emphasis on wage inflation, which has been essentially the most troublesome area for the Fed. This signifies that much attention shall be paid to 3 key monthly inflation reports: CPI, PPI and PCE.
- Employment stays solid and the unemployment rate won’t ever exceed 4%. It is job security that makes people feel more confident about spending than saving, keeping the economy in check.
- Key economic reports bounce back from recent weakness. The most vital is the return of ISM for industry and services over 50 on a everlasting basis. But also many eyes shall be on retail for consumer health.
- A transparent turn in Fed communiqués to think about ending rate of interest hikes…and maybe a return to rate of interest cuts in the long run. The bulls pounced on this front multiple times in 2022 only to receive a painful wake-up call from Chairman Powell. So it is not about guessing whether the Fed is changing. Instead, he hears a definite change from their current hawkish attitude.
Once that happens, you’ll first want to start out benefiting from bearish betting. From there, you begin moving to bullish investments.
In short, “Risk includedThe growth-oriented trades that performed the worst in 2022 will turn out to be major leaders within the early rounds of the brand new bull market. Technology of course. Also consider positions which are economically vulnerable; Industry, materials, transportation, consumer goods, etc.
Worst case scenario for the stock market in 2023
The short and sweet version is that it could be the other of what we’d find at best.
Inflation too high…Fed too hawkish…Job market too weak…Recession too deep…Stock prices fall over 40%
This result suits the headline that starting a recession is like opening up.”Pandora’s box“. When these demons are unleashed, it’s unclear how much damage they’ll do. This is particularly true if employment craters create a really negative chain response:
Job loss > Lower income > Lower expenses > Lower company profits > Lower stock prices
And unfortunately, the #1 solution for corporations affected by diminished profits is to chop expenses later… like more layoffs. And then the vicious circle goes right into a rinse and repeat cycle, driving down the economy and stock prices.
The trading game plan is to stick with bearish bets longer with the underside of the S&P 500 (SPY) likely within the lower range of 2800 to 3000. Note that 2800 is down 42% from all-time highs. It’s hard to assume going much lower.
And then when things get the worst… a recent bull market is prone to emerge. This goes well with the famous Warren Buffett quote “be greedy when others are fearful.”
This is if you flip the switch to more risk-oriented growth investments. Fortunately, their prices will drop so low that even a high-value investor could get on board Tesla (TSLA) and Year (YEAR) of the world with a stone face.
Any of those outcomes is feasible. However, I still think it is best to plan the center scenario first, as described in mine Prospects for the stock market in 2023.
We then remain vigilant and search for these signs that indicate that things are going higher or worse than we expected. Then make the suitable changes to your investment strategy.
I appreciate that every one of this sounds easier said than done. But this is not my first time at a bear market rodeo. In fact, I survived the 4 previous bear markets with good results. Each time learning precious lessons that help with each subsequent edition.
So please proceed with my comments to remain on the best side of the motion and we are going to safely reach the stubborn shores that lie ahead.
What to do next?
Watch my recent presentation: “Prospects for the stock market in 2023” including:
- Why is 2023 the yr “Jekyll and Hyde” yr for stock
- 5 warning signs that the bear will return in early 2023
- 8 profitable trades on the way in which down
- Plan bottom fishing @ market bottom
- 2 trades with over 100% upside potential as a recent bull emerges
- And lots more!
Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, Stock News Network and Editor, Reitmeister Total Return
SPY shares traded at $382.06 a share Friday afternoon, down $1.38 (-0.36%). Year to this point, the SPY is down -18.25% in comparison with the proportion gain of the S&P 500 index over the identical period.
About the Author: Steve Reitmeister
Steve is healthier known to the StockNews audience as “Reity”. He is just not only the CEO of the corporate, but in addition shares his 40 years of investment experience within the industry Total Return Reitmeister Wallet. Learn more about Reity’s background and links to his latest articles and stock offerings.